The Rising Stars of Fintech in Southeast Asia

This is the gritty backdrop to Southeast Asia’s burgeoning fintech revolution: flatted factories and grunting delivery trucks in a Singaporean industrial park, where young techies work in a tiny rented office above a car showroom. No glass-sheathed and Persian-carpeted conference rooms here. Just Kelvin Lee, CEO and co-founder of Fundnel, wearing jeans and running a two-year-old online platform that matches ordinary investors with private firms seeking investments outside traditional channels.

Since its inception Fundnel has closed 15 deals worth $49 million—including selling $20 million worth of convertible bonds for a drone maker—and Lee expects that cumulative top line to double by the end of 2017. Firms like Fundnel are part of a cresting wave of fintech firms hitting the shores of Southeast Asia, a point underscored by the famous Hokusai print of a great wave hanging on Lee’s office wall.

According to the McKinsey Global Institute (MGI), the region has 266 million “financially excluded” people, those without access to bank accounts and other basic financial services like credit cards. Southeast Asia also has 30 million SMEs underserved by the financial system, which collectively face a credit shortfall of $175 billion.

So the basic office decor of a fintech start-up like Fundnel is not for show, another gratuitous illustration of garage start-up chic. They mirror the eventual beneficiary of fintech in Southeast Asia: hundreds of millions of poorer consumers who want to spend and borrow more, certainly, but also want to be better equipped to pay for their child’s education, buy a new home, or cope with calamity. Who are, in short, hungry for greater financial empowerment.

“The reason people spend their money on cars and houses is because they can relate to them,” says Lee. “They can’t relate to public markets.”

Fintech is a portmanteau of “financial technology” and refers to any technological innovation in the delivery of financial services. This includes digital payments, investments, financing, insurance, advisory services, as well as enhancements to companies’ internal processes and financial security.

Note that none of these services are new. They are all offered by large banks and other traditional financial players such as insurance companies, brokerage firms, etc. Indeed, a key difference between fintech entrepreneurs and other start-up founders, says John Sharp, Partner at Hatcher, a venture capital firm, is that the former tend to possess more commercial experience and a better understanding of corporate governance and respect for the regulatory environment.

“Most fintechs are based, in some way, on 400-year old [financial] models,” Sharp says.

With fintech firms sprouting up across the region, how are Southeast Asia’s incumbent banks responding? With remarkable foresight, it would appear, perhaps heeding lessons from their Chinese banking peers, who were caught flatfooted by the rise of the fintech arms of Alibaba and Tencent—Ant Financial and Tenpay, respectively—which stole a march on China’s slow-moving banks and have grown into international financial giants.

The region’s banks, such as DBS and UOB from Singapore, as well as Maybank from Malaysia, are making bets on promising fintech start-ups, partly through in-house accelerator and incubator programs. The region’s fintech firms, in turn, are seeking partnerships with banks whose brands and distribution networks they can leverage. Fundnel, for instance, counts major banks as anchor investors for its private equity deals. MoolahSense, a peer-to-peer lender and another fintech company on our list, last year inked a cross-referral agreement with DBS. In the Philippines, online lender First Circle deploys capital from local banks that it uses to grow its loan book.

Other seeming rivals to Southeast Asian fintech firms appear susceptible to being seduced into co-operation instead of outright competition. For instance, foreign fintech giants such as Alibaba has entered India’s e-commerce and mobile payments space via its large stake in Paytm, the industry leader. Industry observers say that model of strategic investment is likely to be repeated in Southeast Asia.

To be sure, real rivals do exist. A Hong Kong-based fintech angel investor believes that Southeast Asian fintech start-ups, particularly in the B2B space, may have trouble competing with fintech firms from the West, many of which are much more mature with deeper pockets and more validation of their business models. “There will be indigenous innovation, but that trend of overseas companies coming into the region will accelerate,” he says.

Payments start-ups are also wary of other big digital firms encroaching on their turf. Garena, the Singapore-based gaming company, has capitalized on its giant regional user base—45 million PC and 15 million mobile users—to shift into e-commerce and payments. Similarly, Grab, the Singapore-based ride-sharing app, last year announced a strategic partnership with Indonesia’s Lippo Group to implement a digital payments platform for their combined 50 million users in the country. Go-Jek, the Indonesian platform that began as a ride-hailing app, claims it now operates the country’s largest digital wallet.

So the question becomes: Are Southeast Asia’s fintech firms being nurtured by the big boys in order to be eventually bought over and swallowed up by them? Or are they destined to remain niche players in low-rent enclaves on the outskirts of the financial world?

Our tour of Southeast Asia’s growing fintech factory, profiling a group of the most exciting homegrown companies, offers no conclusive answers to either of these questions. It is simply too early to tell. But read on and you will find clues that will help determine these start-ups’ fate—and of the regional financial landscape they are already disrupting.

Kartuku

For many observers, the most promising niche in Southeast Asia’s large portfolio is digital payments. Niki Luhur, president director of Kartuku, an Indonesian payments firm, is optimistic, with digital payments in the sprawling archipelago having hit $15 billion in 2015—and expected to double that by 2020.

UNITY IN DIVERSITY Kartuku's Niki Luhur

Yet Luhur is also circumspect about the challenges ahead in Indonesia. Enabling cashless payments involves the grunt work of educating and wiring up merchants, something Kartuku has been doing since 2001, long before “fintech” was part of our vocabulary.

Consumer adoption of cashless transactions in Indonesia remains sporadic at best. Some individuals will prefer mobile payments, others will aspire first to own status-signaling credit cards. “Cash will always have its uses,” Luhur adds. Also, he wonders, why would individuals in the informal economy, beyond the taxman’s ambit, feel the urge to move online where they can be traced?

Over the past decade, a Gold Rush mentality has gripped some payment providers, he says. “We can’t move fast and break things,” says Luhur, rebuking a start-up mantra. This echoes the sentiments of other fintech pioneers in Southeast Asia, who believe fintech is inherently different from, say, home-sharing because of the sophisticated regulation needed to balance growth and innovation against consumer protection. All fear reputational risk to the fledgling industry from rogue operators.

Nevertheless, Luhur, who is also chairman of the Indonesian Fintech Association (Aftech), believes the regulatory environment in Indonesia—and across the whole region—is increasingly favourable.

In November 2016 the Indonesian central bank issued regulations on licensing, approval and reporting that governs payment gateway and e-wallet providers. It also launched its own fintech monitoring squad to oversee the sector. Luhur is particularly pleased about the stricter data security standards that have been introduced because he feels it will lend legitimacy to the sector as a whole and weed out the weaker and more suspect players.

Luhur, 33, has bookish looks that cloak a steely confidence nurtured, like many Indonesian founders, by having lived in both East and West.

Born in Jakarta, he left home in 1997 for boarding school in the U.S. (Cate School) and then college (Tufts, 2001-05) there. Luhur, keen “to be part of the Valley”, then enrolled in a six-week programme at UC Berkeley’s Haas School of Business, winning a case competition and passing through several rounds of job interviews with different technology firms.

“Then I got the call from my dad,” he says. So in 2006 he returned to Jakarta to join five-year-old Kartuku, in which his father was an angel investor.

At the time, payment processing in Indonesia was still in its infancy. Few merchants had electronic payment facilities; those that did had to deal with a confusing web of relationships with different banks.

Luhur sought to streamline payment processing by working with all the key players: Banks, merchants and payment agents. Kartuku implements both hardware, such as payment terminals, and software, such as Internet payment gateways, for its clients.

The electronic payments segment—including debit and credit cards—has been growing at a steady 15-20% CAGR over the past ten odd years in Indonesia, says Luhur. Though Luhur is bullish about mobile payments, and is conscious of new competitors, such as Go-Jek’s Go-Pay, emerging from unexpected sources, he believes that there is a lot more room for growth in traditional cashless payments. “Sometimes people don’t give plastic enough credit.”

Yet he believes they all have a common goal. “The objective of the Indonesian Fintech Association is very simple,” Luhur says. “How do we displace cash? It’s not about banks versus fintech. It’s about working together to make the world cashless.”

Luhur claims this will, among other things, improve transparency and tax collection while reducing illicit activities—such as money laundering and terrorist financing—as well as the cost of printing cash. “{For} certain notes…the cost of printing the note is higher than the value of the note itself.”

Aftech counts 81 fintech start-ups and 20 large corporations (mostly banks) as members, one indication of Indonesia’s blossoming fintech sector. It is too early to say how it will evolve. “Payments is a really wide space with lots of different segments,” Luhur says. “But it will definitely converge to a few really large players on the consumer front.”

MoolahSense

In early 2014, Lawrence Yong, CEO of MoolahSense, a Singapore-based peer-to-peer (P2P) lending platform, was frustrated. His attempts to convince local regulators of MoolahSense’s business model—one already popular in the West—were making little headway. Yong, boss of a tiny start-up in a country of banking behemoths, was unable to gain access to those at the levers of power.

Fast forward to November 2016. At the inaugural Singapore FinTech Festival, attended by over 11,000 people from more than 50 countries, the Monetary Authority of Singapore (MAS) announced a slew of new fintech policies, including a regulatory “sandbox”, in which qualified start-ups can test new financial technologies in a less stringent environment for a defined period of time.

MoohlaSense's investors celebrate Christmas

Certain core financial regulatory requirements, such as customer confidentiality, will still apply, while others, such as the asset maintenance requirement, license fees and minimum management experience can be relaxed on a case-to-case basis.

Regulators all over Southeast Asia appear engaged in a beauty contest of sandboxes and grants, all eager to incubate the next Paypal. Bitcoin start-ups in Manila, for example, rejoiced in February this year when the Philippine central bank announced its virtual currency regulations. The Philippine remittance market is estimated at $28 billion—part of over $400 billion sent home to emerging markets annually—and bitcoin offers savings of up to 80% in fees compared to traditional operators like Western Union.

In November 2016 MAS awarded MoolahSense a full Capital Markets Services license, the first P2P lender in Singapore to get one (it had till then operated in an unregulated nether region).

MoolahSense’s business model tries to plug two holes in the market. On one end of its platform are the borrowers—SMEs seeking immediate, unsecured short-term financing.

There are typically no credit lines available for firms in these situations, claims Yong. Traditional banks might take too long with approvals or demand collateral. Small firms in desperate need of, say, working capital had to hitherto either rely on family and friends or simply accept a lower growth trajectory.

Firms can use the platform to borrow $10,700 or more for invoice financing and $35,700 or more for business loans. Depending on the structure of the note and the borrower’s credit risk—MoolahSense uses a combination of third-party ratings and internal assessments—notes are priced anywhere from 4.5%-21% per annum.

One firm that’s tapped on MoolahSense’s platform is Seoul Yummy, a Korean restaurant chain that raised $142,900 at 10% per annum over 12 months to fund the opening of two new outlets in Singapore; and Epicentre, an Apple product retailer that raised $714,300 in two equal tranches at 13.5% per annum over 12 months to build inventory and for general expenses. Epicentre’s campaign in March 2016 was a watershed as it represented the first offering from a publicly-listed firm (there have been five others since). It reached its target in under twenty-six hours—still a far cry from MoolahSense’s fastest campaign, a $200,000 note from a security firm funded in thirty seconds.

All these prove attractive alternative investments for the people on the other end of MoolahSense’s crowdfunding platform: ordinary investors of all classes, who invest—or “lend”—sums of $700 and more. MoolahSense says it has over 11,000 approved lenders with some $57 million ready to deploy.

MoolahSense, which has thus far funded 200 campaigns for a total of over $21 million, earns a cut from the borrowers (the SMEs). Though the returns to lenders far outstrip those offered by traditional savings accounts, so do the risks— its current default rate is about 5%.

Yong, 40, was born and raised in Singapore. He attended the National University of Singapore (1999-2002) before working in a variety of banking roles at UBS, Deutsche Bank, Standard Chartered Bank, BNP Paribas, BBVA and Macquarie.

Those experiences revealed to him, among other things, the funding gap SMEs in Singapore face. A firm believer in the importance of small businesses to economic and social development, Yong has a demeanor more suited to a development economist (those who once carried wooden tobacco pipes in their jacket pockets) than an alpha-male banker. MoolahSense tries to attract lenders to its platform by asking of them: “Help Singapore grow.”

MoolahSense has so far raised a total of S$2.1 million in equity, and is in the midst of another fundraising round.

Last year MoolahSense inked a cross-referral agreement with DBS, a Singaporean bank—one indication that fintech start-ups and financial incumbents see the value of cooperation.

According to a Hong Kong-based fintech angel investor, many B2C fintech firms like MoolahSense will necessarily have to form partnerships with bigger institutions.

“The technology in itself isn’t that defensible,” he says. “Financial inclusion and people with access to different investment opportunities at a retail and consumer level is a big story. I’m just a bit more skeptical about whether that’s going to be done as B2C businesses or if they’re going to be done in partnership with the people who own the customers themselves.”

Nevertheless, if MoolahSense keeps growing its client base to capture more of the traditional corporate market, it will inevitably one day be nipping at DBS’s heels.

When asked about the likelihood of this, Yong shrugs. You can almost imagine him puffing on his pipe with a smile.

CashShield

Although most fintech firms are B2C, built on cutting out the various hidden and costly middlemen between businesses and consumers, there is another breed of fintech firms that develops and sells technologies to other businesses—so-called B2B fintech. CashShield is one of those arguably less glamorous but perhaps even more high growth potential firms.

A Singapore-based fraud protection tool used by merchants globally, it takes direct aim at the scourge of global credit card fraud, which surpassed $16 billion in 2014 and is expected to grow to $35.5 billion by 2020, says The Nilson Report, a payments newsletter. Under current regulations, merchants are generally liable for these losses.

Enter CashShield. Its technology sits behind payment gateways and, using a combination of big data, machine learning and proprietary algorithms, it makes an instantaneous decision whether to approve a transaction. It offers its clients—including firms such as Alibaba and T-Mobile—a 100% chargeback guarantee on fraudulent transactions, the first in the world to do so for physical and digital goods.

FRAUD CATCHER CashShield's co-founder, Justin Lie

CashShield traces its roots to the Internet’s early days, when 35-year-old Justin Lie, CEO and co-founder, was a teenager. It was then that the precocious Singaporean teenager spotted a huge arbitrage opportunity in the sale of products such as video game consoles, controllers and games.

He bought them online from North America and resold them locally via eBay, and then later his own websites. As his business grew, it became vulnerable to fraudulent orders from scammers.

To protect his business, Lie created a risk algorithm based on an Excel spreadsheet that would assess every incoming online order and reject those that appeared abnormal.

The success of his homebrewed software solution sparked his belief that he could create an automated fraud protection tool for much bigger e-commerce merchants, many of who were dependent on huge in-house teams of fraud analysts.

By then Lie was living in California. From 2005-07 he studied at Santa Monica College (a community college) and in 2007 enrolled at the University of Southern California.

That same year, Hum Sin Hoon, a professor at the National University of Singapore (NUS), recognised Lie’s potential and convinced him to transfer to the university’s business school back home.

Under Hum’s mentorship, in 2007 Lie set up CashRun, the predecessor to CashShield, incorporating it in Switzerland. He did this, he says, because at the time the Singapore country brand did not have enough cachet in the global fraud protection and online security space, which was dominated by the Americans, Israelis and Swiss.

A Swiss home also allowed CashRun to be near its first few clients, including T-Mobile and Vodafone.

Lie graduated from NUS in 2010. In 2017 he renamed the company CashShield; today it has offices in Berlin, Jakarta, San Francisco and Singapore.

Given the rising share of consumer spending on digital goods, such as a prepaid top-up code, digital movies or a fancy axe for an online “avatar”, fraud prevention is an increasingly time-sensitive operation. With physical goods, say a hard-copy book from Amazon, consumers accept a delay of a few days between online order and delivery. With digital goods, consumers expect instant delivery.

This narrows the window for fraud protection, making digital goods particularly vulnerable to scammers. Yet the necessary sophistication of the operation lends itself to automation. Platoons of manual fraud analysts are giving way to automated security.

Many traditional fraud detection systems, which are typically a combination of software and human operation and oversight, produce subjective scores, such as “60% verified”, for merchants to then act on.

CashShield’s system, which to the firm’s best knowledge is the only fully automated one in the market, spits out a simple “accept” or “reject”; which the firm guarantees through its 100% chargeback protection.

The system works by using big data, machine learning and proprietary algorithms to engage in “passive biometric analysis”—deciphering human behaviour online—as well as “pattern recognition”—spotting patterns in online activity.

Fintechs that can effectively harness modern computer automation are attracting more interest from investors.

“We have seen more interesting stuff in artificial intelligence, deep-learning enabled wealth management start-ups,” says Melvyn Yeo, executive partner at Thirdrock Group, a Singapore-based investment manager. He is also excited by the prospects of “insurtech”—which holds the promise of using big data and other sophisticated analytics to deliver more competitive, tailored insurance—as well as innovative credit scoring technologies.

Junxian Lee, 33, CashShield’s co-founder and CFO, claims its clients have boosted revenues, cut costs and improved service levels by adopting its system. There are two commonly used metrics to assess the efficacy of fraud protection, says Lee. The first is the “false negative” rate—or the share of fraudulent transactions the system accepts. For digital goods, the highest risk category, CashShield’s false negative rate is 0.2% of total value.

To put that in context, when a “big American gaming company” switched from its legacy system to CashShield, says Lee, its false negative rate fell from 5-7% to 0.25%. (Since it offers 100% chargeback protection to its merchants, this is a cost that CashShield bears.)

Yet the false negative rate needs to be assessed in conjunction with the system’s “acceptance rate”. Poor, imprecise systems can reduce their false negative rate by crudely rejecting any order with a whiff of suspicion.

For that same gaming firm, its acceptance rate rose from 70% to 98% after it adopted CashShield.

Even though the business case is clear, fraud protection is not a segment that can be scaled quickly, Lee says.

Part of the reason is that client testimonials are rare. Merchants who adopt CashShield are unlikely to boast about it, not wanting to appear unprotected before the fact. Moreover, CashShield adoption confers on them a “soft competitive advantage”, says Lee, which they are unwilling to reveal to their rivals.

“We started with the highest risk industries,” says Lie, explaining CashShield’s client focus and sequencing. “And now we are moving down towards more traditional e-commerce merchants dealing in physical goods.”

This includes all orders on AliExpress, Alibaba’s online retail service for international buyers—an account CashShield won in early 2017—and Razer, the gaming hardware company. Aside from digital goods and e-commerce, CashShield also serves the travel segment, including airlines and hotels.

According to Lee, most of CashShield’s global competitors are based in the U.S.; about half of who are Israeli firms that incorporated in the U.S. “In Asia we have the most traction,” says Lee. “Our ‘competitors’ here are ten to fifteen year old [legacy] systems. So our numbers just stack up a lot better. We are cheaper, faster, more scalable.”

Lee admits that even though CashShield’s product is good, it needs to do a better job of marketing it. He sees that as a competitive risk to its global expansion, particularly in comparison to its American peers.

The main worry is tail risk. For CashShield, says Lee, this could take the form of, for example, “five very big fraudulent transactions; or on the other end ten million fraudulent five dollar transactions”.

For the former, a few phone calls can ascertain veracity. It is the latter—“coordinated deliberate botnet attacks” that resemble legitimate orders—that worries Lee.

CashShield protects itself against these Black Swan events, says Lee, in three ways: technically, through pattern recognition; legally and contractually, by carefully defining what constitutes “fraud”; and also financially, by purchasing reinsurance.

Bootstrapped from the beginning, it used internal cashflows to fuel growth. “We are very selective about whom we accept investments from,” says Lie. “We don’t really need the money. But we are keen on strategic partnerships, which can give us, for instance, access to new markets.”

CashShield is eager to shift into new product segments as well. It is beta testing its software for use in identity management, which can theoretically be used by everybody from Facebook and Google to Singapore Airlines to prevent “account takeovers”.

In short, CashShield’s ambition is to become the essential security backbone of our digital lives, a large ambition for an erstwhile teenager afraid of getting scammed on the Net.

Fundnel

The birth of fintech is partly due to an interesting cultural mix—buttoned-down bankers partnering with less formal techies and online marketers.

Cue Fundnel. It is a marriage between investment bankers, led by Kelvin Lee, CEO and co-founder, and advertising executives led by Justin Chow, Chief Marketing Officer and co-founder. “They make the money,” jokes Chow, referring to his partner. “We spend it.”

EX-BANKER CHIC Fundnel's co-founder, Kelvin Lee

Fundnel’s platform provides ordinary investors direct access to capital market transactions such as convertible bond issues from early-stage firms. The platform—think crowdfunding for capital markets—purports to increase trust, transparency and efficiency in this traditionally opaque asset class. There are some 4,000 qualified investors on its platform.

For private firms, it is a way of raising capital outside the potentially costly and intrusive public markets, and from investors who might feel a greater emotional resonance with their brands.

Firms on Fundnel’s platform can choose to issue equity, convertible bonds, bonds or engage in revenue sharing arrangements with investors. “Revenue share is easily understood by investors,” says Lee. “We hope that this is a way to bridge the {typical} millennial’s adoption of private investing. We get them interested in businesses that they use and see everyday.”

In the two years since its inception Fundnel has closed 15 deals worth $49 million—including selling $20 million worth of convertible bonds for a drone maker—and Lee expects that sum to double in 2017. Its average deal size is $3.2 million.

Yet Fundnel, which received a Capital Markets Services license from the Monetary Authority of Singapore (MAS) in November 2016, is acutely aware of the need for investor protection. Fundnel’s team of ex-bankers uses exacting standards in its client selection. Of 738 firms that applied to raise funds on its platform, it selected 70, of which only 15 achieved their fundraising targets.

Lee, 33, was born and raised in Singapore. He studied at the National University of Singapore (2005-08) before working in corporate finance at Standard Chartered Bank (2008-11) in Singapore and then investment banking at J.P. Morgan in Hong Kong and Singapore (2011-14).

It was during this last experience, when he worked on deals worth over $20 billion in North and Southeast Asia, that Lee was alerted to the possibility that fintechs could disrupt capital markets.

“The way I-Banks do IPOs is outdated,” Sheng Fu, the CEO of Cheetah Mobile, a Chinese firm whose NYSE listing J.P. Morgan had underwritten, told Lee. Sheng suggested that investment banks will ultimately be replaced by online fundraising platforms like those in the U.S. This is particularly true, he said, for younger growth companies. “If I, as a tech founder, can raise the capital I need without spending so much time on the road fundraising and paying bankers so much fees, I would do so in a heart beat.”

That conversation, in 2014, was when it clicked for Lee. He discovered that in 2010 an important U.S. law had changed that could benefit his putative fintech firm. One thrust of 2010’s Obama Jobs Act was boosting lending in the SME sector. To facilitate that, private unlisted companies were henceforth allowed to raise money publicly from individual, private investors, something that was previously the preserve of public firms. (Jason Best, a co-author of the Obama Jobs Act, is a Fundnel advisor).

At a personal level, Lee had also grown frustrated with the inability of ordinary people to invest early in promising start-ups. Typical fundraising, he says, begin with venture capitalists, then private equity firms, then bigger sovereign wealth funds, then finally an IPO, at which point ordinary investors can take a bite. “Are we really protecting retail investors by allowing them to only come in at that stage?” he asks. It is an important and troubling question.

Chow, 32, was also born and raised in Singapore. He studied at the Singapore Management University (2006-10) before joining Ogilvy as a strategy consultant (2010-14). Befitting his more creative background, Chow is also a founding partner at Manicurious, a manicure and nail art saloon, as well as Jekyll & Hyde, a “mixologist” bar that specializes in exotic cocktails. He is the hip foil to the swish banker Lee.

Chow claims Fundnel has a collaborative relationship with banks and other traditional financial institutions. “Every deal is led by a large institution first, to anchor the round, and then we syndicate the rest of the deal to either angel networks, smaller corporates and so on.”

Still, Chow and Lee recognise that if Fundnel is to achieve its ultimate goal—of building a private exchange for all financial market stakeholders—it is bound to ruffle some feathers. “We want to be the first port of call for all investments for everyday investors for everyday companies in the next five years,” says Lee.

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